January 1st, 2010

Top 10 Stories: December 2009

Posted at 1:00 AM ET

1. Cash and Capital: An Abundance of Choice: Cash and capital have returned to the (re)insurance industry. Despite the severity of last year’s financial crisis, the discipline that helped carriers persevere has become the foundation for recovery — and a plethora of strategic alternatives. Balance sheets have improved, and cash positions have surged. This remarkable change of circumstance will certainly have a substantial impact on the coming reinsurance renewal. Rates are likely to remain flat at January 1, 2010, thanks to stronger capital positions across the industry. Even with last year’s price increases, we are unlikely to see rates return to 2007 levels.

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2. Five Ways to Manage Innovation: To cut through the claims of innovation in the market, you need to know what you’re looking for. There are plenty of capital models, catastrophe models and Enterprise Risk Management (ERM) practices in the (re)insurance industry, but which are the most valuable innovations? The right choices can protect your capital, help you deploy it optimally and ultimately bolster shareholder value … but faux innovation can slow your growth — or leave you exposed to unexpected risk or still leave you exposed when you thought the gap had been filled.

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3. ERM Offers Competitive Compliance for Solvency II, Part III: For Solvency II, regulators have not yet announced plans to approve specific software platforms. Instead, they will focus on the model’s capabilities, embeddedness, implementation and use. For example, Guy Carpenter’s proprietary economic capital model MetaRisk® can be used as the basis for an internal model for Solvency II. MetaRisk is among the fastest, most robust and easiest solutions to use in the (re)insurance industry, making it possible to model countless combinations of risk and capital, identifying the optimal levels and enabling companies to make the allocation decisions that will yield the most favorable results for a given risk tolerance profile.

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4. A Survey of Capital Allocation Metrics: Conclusion: Insurers have choices in evaluating how to allocate capital and its cost. The ultimate goal is to strike a balance between feasibility (based on management acceptance and effort) and capital optimization. Eventually, most companies are likely to migrate towards contribution methods, along the lines of co-xTVaR and the shared asset approach, with thresholds varying with the specific questions being reviewed and specific corporate risk tolerances.

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5. Five Ways to Achieve Competitive Compliance for Solvency II: Solvency II compliance should provide more opportunity than burden … if executed properly. The ability to use approved internal models results in a Solvency Capital Requirement (SCR) that’s tailored to the risks in your portfolio - which in itself is advantageous. This benefit translates into more effective capital management, as it reflects the risks you actually cover (rather than the output of a standard formula). Improved operations through the internal model approach may also free capital for deployment elsewhere — if the model-determined SCR is lower than that from the Solvency II standard formula. The newly available capital can be invested in any number of initiatives that can lead to a competitive advantage.

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6. Capital Modeling in the Age of Systemic Risk, Part IV: Even in the early stages of ERM and economic capital modeling, progress continues. Investments are being made in better risk identification methods and more resilient ERM structures. Capital modeling technology is advancing as well, including better coverage of asset-side risks. With property-catastrophe modeling fairly well established, attention is now turning to casualty catastrophes — a far tougher modeling challenge, as the dimensions of correlation are broader and more complex. Economic bubbles expand and burst with greater frequency and severity. Government intervention policies and practices could be reducing the relevance of the past for forecasting the future. Global interdependency, trading relationships and economic shifts are colliding with property catastrophes, which may be showing the effects of climate change.

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7. Inflation: Not All Bad News for European (Re)Insurers: Inflation is always a major risk factor for the casualty industry. For the past seven years, monetary inflation has been low across most of Europe, and this has helped keep interest rates low. For casualty insurers, this can lead to a challenge, because the key cost-drivers of long-tail liability claims — salaries and wages, pensions and most notably medical care costs — have been growing much faster than monetary inflation.

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8. Protect Your Balance Sheet from Casualty Catastrophe Risk: Indications of an economic recovery and fairly flat renewal are already beginning to obscure the experience of the past year. For professional liability insurers, this is particularly disconcerting, for even as balance sheets grow stronger, the implications of the largest casualty catastrophe in more than 70 years are still unfolding. The lawsuits and claims may take years to resolve, suggesting that the effects of September 2008 will be with us for quite a while. As the situation develops, professional liability insurers should use what they learn to revisit accumulations in their portfolios and take action to protect their capital — and shareholder value — from future worldwide chain reactions of liability exposure.

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9. GC Podcast 12 — Cat Modeling (John Tedeschi): John Tedeschi, Managing Director and Chief  of Catastrophe Modeling in Guy Carpenter’s Instrat® Unit, discusses catastrophe modeling in this new GC Capital Ideas podcast. Click the audio player below to listen to the interview, or download the interview in a file that will work with your iPod.

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10. Reinsurer Financials Point to Savvy Capital Management: Reinsurers have enjoyed a significant recovery in 2009. Effective and disciplined capital management in previous years and good-natured weather enabled them to sit out the financial storm and build up strong cash positions. Meanwhile, the broader financial services industry is still coping with the effects of the worldwide financial crisis. Stability has returned to the reinsurance market, though it remains delicate. But, by all measures, the savvy management of capital and underwriting has been successful.

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